Feb 2, 2023 - Economy & Business

China reopening spurs returns in emerging market funds

Illustration: Aïda Amer/Axios

Emerging market debt and equities have rallied over the last few months. The main driver? China.

Why it matters: It’s another example of how the world's second-largest economy sets the pace for the rest of the globe — or at least that’s what investors are banking on.

  • China’s reopening from punitive COVID-related lockdowns last year has invigorated growth prospects across the emerging market landscape, and investors don’t want to miss out on potential gains after the dismal returns of 2022.

What they’re saying: “Things started rallying mainly on the back of China reopening back in November. That plus more benign inflation coming out of the U.S. really changed the whole mindset toward EM,” Reza Karim, investment manager for EM fixed income at Jupiter Asset Management, tells Axios.

State of play: Inflows to EM stock and bond funds hit record rates in January.

  • And since last November, EM equities have gained nearly 21% — after shedding 29% from January to October, as measured by the iShares MSCI Emerging Markets ETF.
  • EM sovereign bonds are up 10.6% in the last three months, after a negative 16% return over the prior 10 months, using the JPMorgan Emerging Market Bond Index as a proxy.

The big picture: Chinese assets make up a huge portion of the EM investing universe.

  • In addition to ending the economically constricting COVID-zero policies, the government is also easing crackdowns on key areas like real estate and tech, boosting the value of assets in those areas.

Meanwhile: Chinese households have socked away hundreds of billions in excess savings that are now getting spent — particularly on tourism outside the country, Karim says.

  • Reopening vibes are also lifting commodities prices — and many EM corporates are commodities-tied producers or exporters that stand to gain, he adds.

What we're watching: How long these gains will last, especially with U.S. recession fears swirling. As Bloomberg reports, the commodities boost is already showing signs of slowing.

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